Audit firms react as watchdog unveils shake-up plans

Hywel Ball of Ernst & Young LLP. Picture: Jane Barlow

GARETH MACKIE

THE “big four” audit firms have reacted angrily to a report that criticised their stranglehold on the market and claimed they were putting shareholders’ interests behind those of the companies that appoint them.

The industry is dominated by Deloitte, Ernst & Young, KPMG and PwC, and the Competition Commission said it would look at ways of opening up the market, including the prospect of forcing companies to switch auditors every seven years.

Its report found that 31 per cent of FTSE 100 companies have used the same auditor for more than 20 years, which could lead to higher prices, lower quality and “a failure to meet the demands of shareholders”.

That claim was hotly contested by Deloitte, which said it was concerned that the issue of quality risked being ignored in the debate over competition.

Head of UK policy David Barnes said: “We categorically disagree that auditors typically place the interests of management over shareholders.”

Richard Sexton, head of reputation and public policy at PwC, accused the commission of “grossly underestimating” the role that companies’ audit committees play in protecting the interests of their shareholders.

Ernst & Young’s head of assurance for UK and Ireland, Hywel Ball, said the firm “strongly” disagreed with claims that the market is not serving shareholders, adding: “We believe that competition between audit firms is healthy and robust.”

The probe, which began in 2011, was prompted by a House of Lords investigation that blamed the “complacency” of the accounting industry for contributing to the financial crisis.

Laura Carstensen, who chaired the investigation group, said: “It will be challenging to change a long-standing and entrenched system, but our proposals will look to create a situation where tendering and switching become the norm.”

She said “mid-tier” firms such as BDO and Grant Thornton struggled to win contracts because companies are inclined to “stick with what they know”.

Simon Collins, chairman and senior partner of KPMG in the UK, rejected the call for mandatory tendering or rotation, adding: “Audit quality and competition in the UK is strong.”

The big four auditors check the books of every FTSE 100 member except Randgold, the gold miner that ended its ten-year relationship with PwC by switching to BDO in 2007.

BDO managing partner Simon Michaels said the audit market “has been characterised by a lack of choice for clients and by restricted competition”.

But James Barbour, director of technical policy at the Institute of Chartered Accountants of Scotland, said the watchdog’s suggestion that firms are more concerned with retaining clients than working in the interest of investors “does a disservice to the rigorous work and professionalism” of auditors.